CART analysis of qualitative variables to improve credit rating processes

Giampaolo Gabbi, Massimo Matthias and Marco De Lerma
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Massimo Matthias: University of Siena, Italy
Marco De Lerma: University of Siena, Italy

No 179, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: Qualitative behaviours of small firms are explored to forecast criticalities in the Italian credit market. We build up an evaluation process to integrate quantitative rating practices. Research method: Relevant qualitative factors to estimate the credit risk are empirically investigated by choosing variables related to seven perspectives of analysis (sector, governance, internal processes, learning and growth, customers, economic-financial analysis, quality of balance sheet). Outcomes have been elaborated through the Classification And Regression Tree. Rating evaluation is based upon qualitative factors. Findings: The capability to forecast bad firms is 92.4\%, while 84.5\% is the percentage to forecast good firms. The Cumulative Accuracy Curve shows the 84\% ability to explain the variance of phenomenon. Main results: ratings of firms are primary explained by aptitude to reach short and long term purposes; banks’ analysts should integrate their quantitative models with qualitative data; methodologies employed offer a quantitative solution to estimate the weight of each variable. Conclusions: When balance sheets are characterized by small consistency, qualitative variables should be taken into consideration to elaborate or integrate rating procedures.

Keywords: credit risk; qualitative models; rating; regression tree (search for similar items in EconPapers)
JEL-codes: C25 G21 (search for similar items in EconPapers)
Date: 2006-07-04
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:179

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